Apple: The Great Call of China; A Long-Anticipated Deal With China Mobile Is Finally Here—but the Stock Seems to Have Priced Much of It in Already

December 23, 2013 Leave a comment

Apple: The Great Call of China

A Long-Anticipated Deal With China Mobile Is Finally Here—but the Stock Seems to Have Priced Much of It in Already

DAN GALLAGHER

Dec. 5, 2013 2:41 p.m. ET

Many a market rally has been built on the strength of one word: China. But as AppleAAPL +0.51% strikes a deal with that country’s—and the world’s—largest wireless carrier by subscribers, investors should be wary of overplaying it.Apple shares rose Thursday after The Wall Street Journal reported that it had finally signed a deal with China Mobile, 0941.HK +0.65% which may enable the iPhone to launch on its network around Dec. 18. That puts the stock up nearly 9%, or about $42 billion in market value, over the past two weeks as rumors of the impending launch swirled. At almost $568, the stock is now in positive territory for the year, though not back to the more than $700 seen before the launch of the iPhone 5 in September 2012.

China Mobile had 759 million wireless subscribers at the end of October. VerizonVZ -0.93% Wireless had just 88 million in the first quarter of 2011, when it first started selling the iPhone, and it sold about 4.5 million of them in the first two quarters after launch. Gene Munster of Piper Jaffray predicts China Mobile will sell about 17 million iPhones in Apple’s fiscal year ending September 2014.

China Mobile’s impact doesn’t seem to be factored into most analysts’ current forecasts. The consensus estimate has Apple’s revenue rising just 5% in the December quarter—which also includes the launch of new iPads and the first full quarter of the iPhone 5S—and 4% for the March quarter, which would include the bulk of the China Mobile launch.

Rising estimates could provide some additional lift for the stock in coming weeks, along with Carl Icahn‘s newly stated plan to push for a bigger buyback.

But the full economics of the China Mobile deal remain to be seen. Apple has a market share of just 6% in China, according to Canalys. Apple needs growth there to help offset slowing demand for high-end smartphones elsewhere. This, along with China Mobile’s market power, may have forced Apple to make some concessions to get the deal done. The impact of these may not be fully visible until April’s second-fiscal-quarter report. Even if Apple has held firm on price, the iPhone’s cost may limit its appeal to only the upper crust of China Mobile’s customers.

Valuation is another mixed picture for Apple. On many metrics, it looks cheap, trading at about 13 times forward earnings against a five-year average of 14.9. But peers such asCisco Systems, CSCO -1.60% International Business Machines IBM +0.19% andHewlett-Packard HPQ -3.13% trade at multiples of 10 times or under.

Apple’s business is very different from those making primarily high-tech gear for corporate clients. But the market has been hesitant to assign higher multiples to most hardware firms, which may cap the premium Apple’s shares can realistically command

In addition, growth and momentum investors still play a big role in driving Apple’s stock. An analysis by Toni Sacconaghi of Sanford C. Bernstein shows that 73% of U.S. large-cap growth funds own Apple’s shares, down from 82% in December of 2011.

China Mobile has delivered an early Christmas present for Apple’s investors. But there may not be much else remaining under the tree for later.

Filed under Macro Trends

Unknown's avatarAbout bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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